• Maintain BUY, with DCF-derived MYR2.20 TP and 9% upside. Kossan Rubber reported 2023 core profit of MYR34m – below ours and consensus estimates due to subdued ASPs as well as one-off logistical constraints arising from the Red Sea crisis. We gather that ASP had stabilised in 1Q24, with order volume continuing to gain traction amid a more balanced demand- supply dynamic. Our BUY call is premised on gradual improvement in market dynamics (by 2H24) as client inventory level depletes.

• Results overview. Kossan delivered MYR29.5m core profit in 4Q23, -36% QoQ but better than the core loss of MYR1.8m a year ago. The weaker-than- expected results were likely driven by softer ASP (as raw material cost normalised in the previous quarters), coupled with the one-off logistical constraints arising from the Red Sea crisis. Surprisingly, the group declared an interim dividend of 2 sen, being the only glove maker (among the top 4 players) that still pays dividend.

• Margin. Opex was generally lower (on YoY basis), primarily driven by lower natural gas tariff as well as acrylonitrile prices. That said, Kossan is the only glove maker (among the top 4 players) to have never reported negative EBITDA, a sign which indicates solid operating efficiency as well as cost discipline. Moving forward, we expect operating cost to pick up slightly as natural latex prices are 16% higher QTD vs 4Q23 amid a low production season; offset by normalised natural gas prices (QTD price was 21% lower on the back of lacklustre heating demand from Europe amid a warmer-than- expected winter season).

• Outlook. Moving forward, we expect sales volume to pick up sequentially in view of a more balanced demand-supply dynamic by 2H24. We now expect ASPs to trend higher in 3QFY24 in view of elevated raw material prices. All in, we retain our view that gloves demand will continue picking up in the coming quarters, as client inventory levels deplete – this is on top of inventory (stockpiled since 2020) approaching expiry dates (typical shelf life for gloves: 3-5 years).

• Earnings adjustment. We lowered our 2024 and 2025 earnings estimate by 3% and 3% after factoring in less aggressive price hike amid challenges in cost pass-through initiatives. After the earnings adjustment, our TP is unchanged at MYR2.20. Our TP implies 29x 2025F P/E, against its pre-COVID-19 5-year historical mean of 20x. We incorporate an 8% ESG discount to our intrinsic value to derive the TP.

• Key risks: i) Higher-than-expected sales volumes, ii) stronger-than expected USD against MYR, and iii) lower-than-expected raw material prices.

Source: RHB Research - 23 Feb 2024